Common Dividend Investing Mistakes
In the world of investing and the stock market, you can never completely eliminate risk, but you can reduce it by making more good decisions and fewer bad ones as you buy stocks.
Buying a stock solely on a hot tip
A hot tip is just that — a tip, an idea to follow up on. You still need to do your research — pull up the company’s quarterly statements over the past year or so, crunch the numbers, see whether any insiders are buying shares, and perhaps even speak with one of the company’s representatives (or at least your broker) to check on the company’s prospects moving forward.
Don’t rely solely on the word of a friend, relative, colleague, or even broker to choose which stocks to buy.
Skipping your homework
Those who win the day are the investors who do their homework and keep a cool head when everyone else is losing theirs. The best way to keep a cool head is to know what you own, what you’re buying, what you’re selling, and why. If you know you own well-managed companies that have a solid track record for growing sales, profits, and dividend payments, you’re less likely to get spooked when the market takes a dive. You can look for deals instead of looking for the exits.
Focusing solely on yield
When people start investing in dividend stocks, they automatically gravitate to the high-yield stocks. But depending on the industry, a high-yield stock can just as often be a sign of trouble as a sign of big profits. Don’t let yield blind you to a company’s growth prospects. Often, a company with a lower-than-average dividend that’s experiencing solid growth and consistently increasing its dividend may be a better choice than a company with a larger yield that’s currently in stagnation mode.
Don’t buy a stock simply because it has a high yield. Find out whether the yield is high because of high dividend payments, low share price, or both. Examine the company’s fundamentals as well as the broad market and economic environment. Perform additional research to ensure that the company is sound before you invest in it.
Buying a stock just because it’s cheap
Knowing the difference between a low share price and a good value is the difference between making and losing money; just because a stock is cheap doesn’t mean it’s a bargain. Admittedly, buying a cheap stock is tempting. However, buying a stock just because it’s cheap isn’t investing — it’s speculating or betting. To steer clear of this trap, carefully research a cheap stock’s company fundamentals. Unlike large and higher-priced stocks, you usually find very little other information about these low-priced companies. As long as you stick with the dividend investing model, you should be free of any temptation to buy a stock solely because it has a low share price.
Giving too much credence to media reports and analysis
Financial newspapers and magazines, Web sites, and investment TV and radio shows are all excellent sources of information, but they’re not always right. That’s because they rely on information from company insiders. Here a few points to remember about media sources:
Monthly magazine articles on investing are written about two months before publication. Conditions may radically change in an industry, the economy, or the market to make this information out of date before it even hits the newsstand.
Television financial personalities are entertainers first and analysts or commentators second. Television commentators tend to be big cheerleaders for the stock market, even in the face of all evidence to the contrary, because that’s what keeps viewers.
Web sites and blogs may have a personal agenda to promote and may not follow strict journalistic standards for accuracy.
Don’t assume any single source is 100 percent reliable. A company’s financial documents are always the best source. Financial newspapers and their Web sites come second. But newspapers can make mistakes, too. Always verify the information by comparing it to other sources and your own instincts and insight.